#dnaEdit: Warning to loan defaulters

It emerged at Finance Minister Arun Jaitley’s annual performance review meeting of public sector banks, financial institutions and private sector banks that the reasons for the slow credit outflow is not tied to the interest rates alone. The general assumption has been that if the interest rates go down there will be higher credit off-take, and this would in turn signal economic activity leading to growth. Interest rates however seem to be tied to several other crucial questions. One of them is that of non-performing assets (NPAs).

NPAs in the public sector bank books have always been controversial. There is one school of economists which believes that NPAs arise out of a government’s inviable subsidy schemes. The other school points the finger at “rogue” private sector corporations defaulting on their massive loans.  It has to be conceded that political populism through subsidies and crony capitalism through loans to private players contribute to the NPA problem of the banks, but there are other reasons as well. 

The bankers have pointed out that the stalling of infrastructure projects is one of the contributing factors to the NPA. That is, the banks have rolled out loans to private sector companies to execute infrastructure projects, which have been held up due to bureaucratic bottlenecks like getting clearances. The private sector companies involved in these projects are not raising a hue and cry because they did not invest their own funds but funds they had borrowed liberally from public sector banks. Jaitley reportedly promised the bankers that he will take up the issue with the respective state governments about expediting the stalled projects.

There is another difficulty with the infrastructure projects as well. Chief economic advisor in the finance ministry, Arvind Subramanian, had pointed out in the mid-year economic review in December 2014 that liberal borrowings by private players from the public sector banks for infrastructure projects is a weak link in the public-private partnership (PPP) model. The projects remain hanging and there is an alarming growth in the NPAs of the PSBs. Apart from nudging the state governments to get the infrastructure projects going, the government may have to seriously rethink the PPP model so as to improve its efficiency by holding the public sector as well as the private sector partners liable for delay in completion of projects.

The NPAs look larger because of the smaller volume of financial growth due to slow down in the global economy. If the turnover volumes are larger, then the bad loans or NPAs would become smaller in the balance sheet. This would not mean that the NPAs cease to be a problem. When financial transactions are brisk, the NPAs become manageable. 

The other challenge that the Finance Minister has on his hands is that of balancing the financial obligations that the government has taken upon itself through the various insurance and pension schemes for the vulnerable sections that Prime Minister Narendra Modi has announced in the last one year as part of the financial inclusiveness policy. It has been found that the private sector banks’ participation in these schemes was only four per cent. Jaitley has asked the private banks to do more, telling them that in the longer term they will stand to benefit by  active participation. The current situation has compelled the government to do a tricky tightrope walk. It has to ask the banks to lend for infrastructure and other projects as well as lend a helping hand in the welfare schemes but without breaking the back of the banking system.